10 best-performing S&P 500 stocks of 2014

Insight: There have been many surprises, as M&A heats up and yields decline

The S&P 500 Index
SPX, -0.88%
has returned 5% this year after soaring 32% in 2013, but there have been many surprises for investors, including the fact that two airline companies are among the best performers.

The benchmark index keeps hitting records, as stocks are being supported, in part, by an unexpected drop in interest rates. The yield on 10-year U.S. Treasury notes has declined 42 basis points this year to 2.48%, as investors have continued to snap up U.S. government paper even as the Federal Reserve winds down its monthly bond purchases aimed at keeping rates low.

There are daily warnings that the stock market may be overvalued. That’s because the S&P 500 trades for 14.5 times the 2015 consensus earnings estimates, among analysts polled by FactSet. That’s up from 13.3 a year ago, and the highest since the pre-crisis days of 2007.

Another sign that we could be at the late stage of a market rally is the vastly increased number of M&A deals this year. There have been 837 transactions involving U.S. and Canadian firms, compared with 220 a year ago, according to FactSet. Hot sectors for deals have included telecommunications and pay television, with AT&T Inc.T, -0.97%agreeing in May to purchase DirecTV
DTV, -0.83%
for $48.5 billion and Comcast Corp.CMCSA, -0.25%
announcing an agreement in February to snap up Time Warner Cable Inc.
TWC, +0.41%
through a $45 billion stock swap.

Here are the 10 S&P 500 stocks with the highest returns, including reinvested dividends, this year through Thursday’s market close:

The group is diversified, although there are two airlines among them, as well as two pharmaceutical firms and two companies involved in oil exploration and drilling.

Looking at the top performers won’t help you guess which stocks or sectors will outperform for the rest of the year, but the economic, market and M&A trends that have pushed these stocks so high can provide plenty of food for thought:

Forest Laboratories

The top S&P 500 performer so far this year is Forest Laboratories Inc., which closed at $95.75 Thursday, for a year-to-date return of 60%, following a 70% advance in 2013. The stock has returned 304% over five years, which compares with a 132% increase for the S&P 500.

The stock popped 28% on Feb. 18 after the company agreed to be acquired by Actavis PLC
ACT, -2.34%
for $25 billion in cash and stock. The deal, when announced, was valued at $89.40, for a premium of 25%.

And then on April 28, Forest Laboratories announced a deal to acquire Furiex Pharmaceuticals Inc.
US:FURX
for $1.1 billion in cash, which comes to roughly $95 a share, or a 19% premium. But there’s another possible sweetener for Furiex’s shareholders, consisting of “up to $30 per share (approximately $360 million in aggregate) in a Contingent Value Right (CVR) that may be payable based on the status of eluxadoline, Furiex’s lead product, as a controlled drug following approval,” according to Forest’s deal announcement.

There’s a built-in floor to the stock price for Forest Laboratories, assuming the merger with Actavis is approved. But there have been some challenges from investors who were hoping for a higher takeout price, as is typical for large M&A deals. Forest Laboratories last week agreed to disclose additional information about previous merger offers to shareholders.

Nabors Industries

Second-best this year among the S&P 500 is Nabors Industries Ltd.
NBR, +0.07%
which is a contract oil driller headquartered in Bermuda. The company also provides various services to manage oil wells through their entire life cycles. The stock is up 54% this year through Thursday’s close at $54.30, following a 19% return last year. The five-year total return is 48%, which is the second-worst performance among the stocks listed here.

The shares trade for 13.5 times the consensus 2015 earnings estimate of $1.94 a share, among analysts polled by FactSet. That is the second-lowest forward price-to-earnings ratio among this year’s top 10 S&P 500 stocks. The consensus 2014 EPS estimate is $1.16.

Nabors reported a 2% decline in first-quarter revenue to $1.59 billion, while net income dropped to $49.9 million, or 17 cents a share, from $99.1 million, or 34 cents, a year earlier. The revenue decline was attributed to expected “weather-induced interruptions,” Nabors CEO Tony Petrello said in the company’s earnings release.

Jefferies analyst Brad Handler on May 21 upgraded Nabors Industries to “buy” from “hold” on expectations for growing international demand and the “pending” announcement of the company’s internal strategic review.

Electronic Arts

Third-best among S&P 500 components this year is Electronic Arts Inc.
EA, -1.10%
The game software developer’s stock is up 52% this year through Thursday’s close at $34.76, following a 58% increase in 2013. The five-year return is a rather low 51%, when compared with the index.

EA’s shares trade for 15.6 times the consensus 2015 EPS estimate of $2.23. Analysts are expecting EPS to grow by 19% from $1.87 this year.

The stock soared 21% on May 7, after the company reported year-over-year declines in fiscal fourth-quarter net revenue and earnings, but a 21% increase in cash flow from operations, to $281 million. For all of fiscal 2014, which ended on March 31, net cash provided by operating activities more than doubled to $712 million.

EA also provided guidance, with adjusted net revenue for 2015 expected to grow 2% to $4.10 billion. The company expects, on a GAAP basis, to earn $2.37 a share in 2015, compared with 3 cents in 2014, but also projected non-GAAP EPS of $1.85, which will reflect a net revenue decline of $275 million, because of a change in the way online gaming revenue is recognized. Fiscal 2014 non-GAAP EPS totaled $1.73.

Keurig Green Mountain

Keurig Green Mountain Inc.
GMCR, -1.96%
ranks fourth, with a total return 50% this year, following a 2013 jump of 83%. The five-year total return is a staggering 511%, and Keurig Green Mountain is one of only two firms on the top 10 list to grow its annual revenue per share for five straight years, according to FactSet.

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